Guide on sole trader accounts and bookkeeping

If you've created a company or are considering starting one, you'll need to choose a business structure. You can opt to start a limited company, work as a solo trader or a partnership. Each business structure differs, particularly in terms of accounting and bookkeeping. Because sole traders are classified as self-employed, they must follow their own set of tax rules and regulations.

Accounting for small business is critical, and it must be done correctly. To assist you obtain a better grasp of what it's like to run a business as a sole trader, we've put together this guide to single trader accounts and bookkeeping.


Business account

Because a sole trader and their business are considered one thing, you don't require a business account legally. However, it is strongly advised that you open a company account and keep your personal account separate, since this will make managing your business funds much easier.
Even if you are self-employed, having a business account has numerous benefits. The advantages include the ability to use a ‘trading as' to make your firm appear professional rather than using your personal name, as well as the ability to quickly identify business income and expenditure, which makes filing your self-assessment tax return easier.
When selecting a bank with which to open a business account, make sure to consider the costs and benefits available. A corporate bank account usually comes with a cost, whereas a personal account is usually free. However, the advantages of having a business account outweigh the minor cost.

Sole trader taxes

As a business owner, you must be aware of the taxes that apply to you, regardless of the structure you choose. It's critical that you grasp the self-employed tax rates and facts. As a sole trader, you should be aware of the following tax facts.

Personal Income

For the tax year 2020/21, the personal income allowance is £12,500. This signifies that this amount of income will not be taxed in the United Kingdom. As a result, a sole trader's taxable income will be limited at £12,500.
In addition, there are three tax bands: basic, higher rate, and upper rate. The base rate band applies to income up to £50,000 and is 20%. The top rate band is 40%, and it applies to income between £50,501 and £150,000. The second upper band, which applies to income of £150,000 or above, is 45 percent.

National Insurance Contributions

  • Class 2 and Class 4 NICs must be paid by sole traders. Setting up a direct debit is the best way to pay NICs.
  • Class 2 NIC is £3.05 per week and must be paid by anyone who earns more than £6,475 as a self-employed person throughout the tax year.
  • Self-employed people must pay Class 4 NICs on their profits. On annual profits between £8,632 and £50,000, the Class 4 NICs rate is 9%. Then there's a 2% surcharge on profits over £50,000 each year.

VAT

If a company's revenue surpasses the VAT threshold during the tax year, it must register for VAT. For the tax year 2020/21, the VAT threshold is £85,000. More on the VAT threshold and how to register.

Records

It's critical to maintain track of a company's revenue and expenses. This will greatly simplify the process of paying and dealing with taxes. Make a point of saving all of your receipts and invoices so you'll be ready when the self-assessment deadline arrives. There are also business apps that allow you to photograph your receipts, making it easier to keep track of your expenses without worrying about losing them.
A business bank account can also help you keep track of your business expenses.

Self-assessment tax return

You must register for self-assessment with HMRC before you can start your business. They will give you login information so that you may file your tax return when the deadline arrives (which is the 31st of January every year, for the previous tax year). For example, you must pay your taxes and National Insurance Contributions (NICs) by January 31, 2022 for the tax year 2020/2021. Every year, the tax year runs from April 6 through April 5 of the following year. Despite the fact that the deadline for self-assessment tax returns is January 31st, you can pay your taxes at any time after the end of the tax year. For more information on filing your self-assessment tax return, click here.
You can seek the help of an accountant if you struggle to deal with your taxes. There are multiple small business accountants in Croydon that can help.

Claiming business expenses

It's critical to maintain track of any expenses linked to your business so that you can claim them afterwards. You may also be able to deduct part of your home expenses if you work from home. As a self-employed sole trader, you can deduct the following expenses:
  • You sell materials or equipment.
  • Salaries and pay for employees
  • Expenses for travel
  • Rent, water, light, heat, insurance, and security are all included in the business rates.
  • Stationery and phones are examples of office supplies.
  • Advertisement
  • Bank loans have interest.
  • Courses of instruction

Bookkeeping

You must set aside a specific amount each month in order to be able to pay your taxes when the self-assessment deadline arrives. It is suggested that you set aside at least 20% of your income for tax purposes. This will make it easier to pay the tax bill. Preparation is essential for dealing properly with taxes and paying them on time.
To be able to pay your taxes when the self-assessment deadline approaches, you must set aside a particular amount each month. At least 20% of your income should be kept aside for tax purposes, according to experts. This will make paying the tax bill a lot easier. It is critical to plan ahead of time when it comes to dealing with taxes and paying them on time.

Mistakes to avoid

You must avoid making blunders when it comes to bookkeeping and managing your solo trader accounts. Here are some of the most common mistakes to avoid in order to keep your company's finances in line:
  • Leaving everything to the last minute - it's critical that you plan ahead of time and set aside money each month to pay your taxes.
  • To avoid getting your personal and business finances mixed up, open a business account.
  • Not maintaining receipts - you could assume that receipts for coffee with clients aren't worth saving, but minor expenses can mount up quickly.
  • Bank reconciliation - is the process of checking all of your account's incomings and outgoings to ensure that everything is in order. This should be done on a frequent basis.

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